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RESERVEBANKOFINDIA
:www.rbi.org.in/hindi
Website:www.rbi.org.in
email:helpdoc@rbi.org.in
J une 3, 2014
Second Bi-Monthly Monetary Policy Statement, 2014-15 By
Dr. Raghuram G Rajan, Governor
Monetary and Liquidity Measures
On the basis of an assessment of the current and evolving macroeconomic
situation, it has been decided to:
keep the policy repo rate under the liquidity adjustment facility (LAF)
unchanged at 8.0 per cent;
keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.0 per
cent of net demand and time liabilities (NDTL);
reduce the statutory liquidity ratio (SLR) of scheduled commercial banks by 50
basis points from 23.0 per cent to 22.5 per cent of their NDTL with effect from
the fortnight beginning J une 14, 2014;
reduce the liquidity provided under the export credit refinance (ECR) facility
from 50 per cent of eligible export credit outstanding to 32 per cent with
immediate effect;
introduce a special term repo facility of 0.25 per cent of NDTL to compensate
fully for the reduction in access to liquidity under the ECR with immediate
effect; and
continue to provide liquidity under 7-day and 14-day term repos of up to 0.75
per cent of NDTL of the banking system.
Consequently, the reverse repo rate under the LAF will remain unchanged at
7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0
per cent.
Assessment
2. Since the first bi-monthly monetary policy statement of April 2014, global
activity is evolving at different speeds. A broad-based strengthening of growth is
gaining traction in the US and the UK, after a moderation in the first quarter of 2014
due to adverse weather conditions. However, in the euro area, recovery is struggling
to gather momentum. The pick-up in sales in J apan in anticipation of the
consumption tax hike has been followed by a sharp fall in consumer spending.
Growth in coming quarters will depend on all three arrows being put in play.
Structural constraints continue to impede growth prospects in emerging market
economies (EMEs), with concerns about the slowdown in China as its economy
rebalances. Financial markets across the world still remain vulnerable to news about
the impending normalisation of interest rates in some developed economies, even as
some valuations appear frothy.
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3. Lead indicators point to continuing sluggishness in domestic economic activity
in the first quarter of 2014-15. The outlook for agriculture is clouded by the
meteorological departments forecasts of a delay in the onset of the south-west
monsoon with a 60 per cent chance of the occurrence of El Nino. The ongoing
contraction in the production of consumer durables and capital goods, coupled with
moderation in corporate sales and non-oil non-gold imports, is indicative of continuing
weakness in both consumption and investment demand. The decisive election result,
together with improved sentiment should, however, create a conducive environment
for comprehensive policy actions and a revival in aggregate demand as well as a
gradual recovery of growth during the course of the year.
4. Retail inflation measured by the consumer price index (CPI) increased for the
second consecutive month in April, pushed up by a sharp spike in food inflation,
especially in the prices of fruits, vegetables, sugar, pulses and milk. CPI inflation
excluding food and fuel has moderated gradually since September 2013 although it is
still elevated.
5. For the year 2013-14 as a whole, Indias current account deficit (CAD)
narrowed sharply to 1.7 per cent of GDP, primarily on account of a decline in gold
imports, although other non-oil imports also contracted with the weakening of
domestic demand, and there was some pick-up in exports. In April 2014, the trade
deficit narrowed sharply due to resumption of export growth after two consecutive
months of decline, and the ongoing shrinking of import demand. Robust inflows of
portfolio investment, supported by foreign direct investment and external commercial
borrowings, kept external financing conditions comfortable and helped add to
reserves.
6. With the unwinding of year-end window dressing, the corresponding decline in
the size of excess CRR holding of banks as well as the sharp decline in Government
cash balances with the Reserve Bank as a result of Government expenditure,
liquidity conditions improved significantly in April and May 2014. The average daily
access to liquidity from the LAF and term repos during this period has been close to
1.0 per cent of NDTL. The Reserve Bank will continue to monitor liquidity conditions
and will actively manage liquidity to ensure adequate flow of credit to the productive
sectors.
Policy Stance and Rationale
7. In March and April, CPI headline inflation has risen on the back of a sharp
increase in food prices. Some of this price pressure will continue into May, but it is
largely seasonal. Moreover, CPI inflation excluding food and fuel has been edging
down. The risks to the central forecast of 8 per cent CPI inflation by J anuary 2015
remain broadly balanced. Upside risks in the form of a sub-normal/delayed monsoon
on account of possible El Nino effects, geo-political tensions and their impact on fuel
prices, and uncertainties surrounding the setting of administered prices appear at this
stage to be balanced by the possibility of stronger Government action on food supply
and better fiscal consolidation as well as the pass through of recent exchange rate
appreciation. Accordingly, at this juncture, it is appropriate to leave the policy rate
unchanged, and to allow the disinflationary effects of rate increases undertaken
during September 2013-J anuary 2014 to mitigate inflationary pressures in the
economy.

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8. The Reserve Bank remains committed to keeping the economy on a
disinflationary course, taking CPI inflation to 8 per cent by J anuary 2015 and 6 per
cent by J anuary 2016. If the economy stays on this course, further policy tightening
will not be warranted. On the other hand, if disinflation, adjusting for base effects, is
faster than currently anticipated, it will provide headroom for an easing of the policy
stance.

9. Contingent upon the desired inflation outcome, the April projection of real GDP
growth from 4.7 per cent in 2013-14 to a range of 5 to 6 per cent in 2014-15 is
retained with risks evenly balanced around the central estimate of 5.5 per cent (Chart
2). The outlook for the agricultural sector is contingent upon the timely arrival and
spread of the monsoon. Easing of domestic supply bottlenecks and progress in the
implementation of stalled projects should brighten the outlook for both manufacturing
and services. The resumption of export growth is a positive development and as
world trade gathers momentum, the prospects for exports should improve further.



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10. In pursuance of the Dr. Urjit R. Patel Committees recommendation to move
away from sector-specific refinance towards a more generalised provision of system
liquidity without preferential access to any particular sector or entity, the Reserve
Bank has decided to limit access to export credit refinance while compensating fully
with a commensurate expansion of the markets access to liquidity through a special
term repo facility from the Reserve Bank (equivalent to 0.25 per cent of NDTL). This
should improve access to liquidity from the Reserve Bank for the system as a whole
without the procedural formalities relating to documentary evidence, authorisation
and verification associated with the ECR. This should also improve the transmission
of policy impulses across the interest rate spectrum and engender efficiency in
cash/treasury management.
11. As the economy recovers, investment demand and the need for credit will pick
up. To the extent that this contributes eventually to supply, it is important that banks
have the room to finance it. A reduction in the required SLR will give banks more
freedom to expand credit to the non-Government sector. However, the Reserve Bank
is also cognisant of the significant on-going financing needs of the Government.
Therefore, the SLR is reduced by 0.50 per cent of NDTL, with any further change
dependent on the likely path of fiscal consolidation
12. With a view to improving the depth and liquidity in the domestic foreign
exchange market, it has been decided to allow foreign portfolio investors to
participate in the domestic exchange traded currency derivatives market to the extent
of their underlying exposures plus an additional US$ 10 million. Furthermore, it has
also been decided to allow domestic entities similar access to the exchange traded
currency derivatives market. Detailed operating guidelines will be issued separately.
13. As a prudential measure, the eligibility limit for foreign exchange remittances
under the Liberalised Remittance Scheme (LRS) had been reduced to US$ 75,000
last year. In view of the recent stability in the foreign exchange market, it has been
decided to enhance the eligible limit to US$ 125,000 without end use restrictions
except for prohibited foreign exchange transactions such as margin trading, lottery
and the like. Operating guidelines will be issued separately.
14. At present, only Indian residents are allowed to take Indian currency notes up
to `10,000 out of the country. Non-residents visiting India are not permitted to take
out any Indian currency notes while leaving the country. With a view to facilitating
travel requirements of non-residents visiting India, it has been decided to allow all
residents and non-residents except citizens of Pakistan and Bangladesh to take out
Indian currency notes up to `25,000 while leaving the country. Operating guidelines
in this regard are being issued separately.
15. The third bi-monthly monetary policy statement is scheduled on Tuesday,
August 5, 2014.


Alpana Killawala
Press Release : 2013-2014/2343 Principal Chief General Manager